AUD/USD and NZD/USD Fundamental Daily Forecast – RBA to Raise Rates to Fight Relentless Inflation

The Australian Dollar is edging higher on Tuesday shortly before the release of the Reserve Bank of Australia’s (RBA) monetary policy and interest rate decisions at 03:30 GMT.

Traders expect the RBA to deliver a fourth straight quarter-point interest rate hike and is likely to follow up with a fifth in March as it grapples with an unexpected revival in inflation, a Reuters poll found.

All but one of 31 economists polled said the RBA would raise its official cash rate by 25 basis points to 3.35% at its meeting on Feb. 7. Only one respondent in the Jan. 27-Feb. 2 survey expected no change.

At 03:00 GMT, the AUD/USD is trading .6922, up 0.0038 or +0.55%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.00, down $0.50 or -0.73%.

Rising Inflation Still a Problem for Policymakers

RBA officials and most analysts had expected price rises to cool toward the end of last year but were caught off guard. The latest report showed inflation rose from 7.3% to a 33-year high of 7.8% last quarter, more than double its 2-3% target range.

The news likely spooked RBA policymakers into revising any immediate plans to pause what already has been a late-starting and more conservative approach to raising rates compared with its peers. But it has brought forward the expected end, now set at the March meeting and not June.

RBA Proceeding with Caution

The RBA has raised interest rates by a total of 300 basis points, and appears to be proceeding with caution while keeping an eye on a rapidly slowing housing market. The U.S. Federal Reserve and the RBNZ have hiked rates by 450 and 400 basis points respectively in the current hiking cycle.

But one-third of economists polled expected the cash rate to rise above the current predicted peak of 3.60% by mid-year.

Australia Trade Balance Shrinks More than Expected in December

Australia’s trade balance shrank more than expected in December, data showed on Tuesday, driven largely by a fall in the exports of mineral fuels and mining goods, while imports increased slightly on demand for overseas travel.

Australia’s trade balance fell to a surplus of A$12.24 billion from A$13.20 billion in the prior month, the Australian Bureau of Statistics (ABS) said in a statement. The reading was below expectations for a trade surplus of A$12.50 billion.